Turnover, account value and diversification of real traders: evidence of collective portfolio optimizing behavior

TL;DR

This paper analyzes real trader behavior using Swissquote Bank data, revealing relationships between trading activity, account size, and diversification, and introduces a model based on mean-variance optimization with transaction costs.

Contribution

It provides empirical stylized facts about trader behavior and develops a model that accurately reproduces observed trading patterns considering transaction costs.

Findings

Empirical relationships between turnover, account value, and diversification.

A mean-variance portfolio model with transaction costs reproduces observed behaviors.

Evidence of collective portfolio optimization among traders.

Abstract

Despite the availability of very detailed data on financial market, agent-based modeling is hindered by the lack of information about real trader behavior. This makes it impossible to validate agent-based models, which are thus reverse-engineering attempts. This work is a contribution to the building of a set of stylized facts about the traders themselves. Using the client database of Swissquote Bank SA, the largest on-line Swiss broker, we find empirical relationships between turnover, account values and the number of assets in which a trader is invested. A theory based on simple mean-variance portfolio optimization that crucially includes variable transaction costs is able to reproduce faithfully the observed behaviors. We finally argue that our results bring into light the collective ability of a population to construct a mean-variance portfolio that takes into account the structure of transaction costs